The intended AREIT poises earnings risk to MAHB under RAB structure, given the AREIT is intended to fund future airport capex and maintain MAHB as an asset light operator. Subsequently MAHB’s earnings will be kept low due to low asset base under RAB. The imposition of levy on ASEAN/international travellers will also marginally affect travel demand (both MAHB and AirAsia) as well as the cost structure of AirAsia. We downgrade MAHB to HOLD (from BUY) with lower TP: RM8.00 (from RM10.00) on earnings cut and heightened earnings risk. We maintain BUY on AirAsia with lower TP: RM4.00 (from RM4.65) based on 10% discount to SOP: RM4.42, on earnings cut and lower market value of associates. In view of these negative developments to the aviation sector from Budget 2019, we downgrade our sector rating from Overweight to NEUTRAL.

NEWSBREAK

Establishing AREIT. The Government intends to set up the world’s first AREIT (Airport Real Estate Investment Trust), enabling it to raise RM4bn (based on 30% stake sale to private investing institutions). Investors of the AREIT will receive income arising from user fees collected from Malaysia Airports Holdings Bhd (MAHB) which has the concession to operate these airports. Going forward, the AREIT will have the opportunity to raise funds publicly either by issuing new AREIT units or via borrowings in order to fund the improvement and expansion of airports, especially those facing over-capacity. This financial structure will significantly reduce the debt burden of the Government to fund all of these projects on its own, while maintaining MAHB as an asset light operator not bogged down by heavy capital investments and debt.

Levy on ASEAN/international travellers. The Government proposes to impose a departure levy for all outbound travellers by air starting 1 June 2019. The proposed rate is 2-tiered, RM20 for outbound travellers to ASEAN countries and RM40 to countries other than ASEAN.

HLIB’s VIEW

MAHB

Negative. The establishment of AREIT to fund the airport capex is contradicting with the concept of RAB (regulated asset base), where MAHB incurs airport capex and become an asset heavy operator (as opposed to government intention to maintain MAHB as an asset light operator). Under RAB structure, MAHB’s allowable earnings are dependent on the asset base size (driven by capex spent by MAHB). However, AREIT will limit MAHB capex and asset base size, hence affecting MAHB’s earnings outlook. Nevertheless, there are no clear guidelines and information regarding the AREIT and RAB at the moment. On the other hand, the additional levy is channelled into the Government coffers (not to MAHB) and may marginally affect air travel demand.

Downgrade to HOLD, TP: RM8.00. We downgrade MAHB to HOLD (from Buy) with lower TP: RM8.00 (from RM10.00) after cutting our earnings for FY19 (-2.6%) and FY20 (-2.3%) as well as heightened earnings risk from AREIT and RAB.

AirAsia

Negative. While AREIT has no direct effect on AirAsia, the levy on departing ASEAN/international travel will affect its earnings. AirAsia may have to absorb the levy, affecting its margin or choose to pass-on the levy to consumers, marginally affecting the demand for air travel for ASEAN destination. AirAsia will continue to innovate with cost savings and increasing ancillary income to protect its margin.

Maintain BUY, TP: RM4.00. We maintain BUY recommendation on AirAsia with lower TP: RM4.00 (from RM4.65) based on 10% discount to SOP: RM4.42, after adjusting earnings for FY19 (-13.9%) and FY20 (-14.8%) and market capitalization of associates. We remain positive outlook on AirAsia, given: (1) strong air travel demand and high load factors; (2) higher yields to offset the current high jet fuel price; and (3) expected high dividend payout by end 2018.

Downgrade Sector to NEUTRAL

In view of the negative developments to the aviation sector arising from Budget 2019, we downgrade our sector rating from Overweight to NEUTRAL.

Source: Hong Leong Investment Bank Research - 5 Nov 2018